Reference no: EM132587554

Question - On July 1, 2016, Killearn Company acquired 103,000 of the outstanding shares of Shaun Company for $21 per share. This acquisition gave Killearn a 40 percent ownership of Shaun and allowed Killearn to significantly influence the investee's decisions.

As of July 1, 2016, the investee had assets with a book value of $6 million and liabilities of $1,468,500. At the time, Shaun held equipment appraised at $140,000 above book value; it was considered to have a seven-year remaining life with no salvage value. Shaun also held a copyright with a five-year remaining life on its books that was undervalued by $562,500. Any remaining excess cost was attributable to goodwill. Depreciation and amortization are computed using the straight-line method. Killearn applies the equity method for its investment in Shaun.

Shaun's policy is to declare and pay a $1 per share cash dividend every April 1 and October 1. Shaun's income, earned evenly throughout each year, was $580,000 in 2016, $606,600 in 2017, and $649,200 in 2018.

In addition, Killearn sold inventory costing $93,000 to Shaun for $155,000 during 2017. Shaun resold $97,500 of this inventory during 2017 and the remaining $57,500 during 2018.

Required -

1. Determine the equity income to be recognized by Killearn during each of these years.

2. Compute Killearn's investment in Shaun Company's balance as of December 31, 2018.